Fitch Ratings has upgraded the Individual and Preferred Stock ratings of Bank of America Corporation (BAC) and removed them from Rating Watch Positive as follows:
--Individual to 'C' from 'C/D';
--Preferred Stock to 'BBB-' from 'BB-';
--Trust Preferred to 'BBB-' from 'BB'.
Other ratings, including the long-term Issuer Default Rating (IDR) of 'A+' and the short-term IDR of 'F1+', are affirmed at current levels. The Rating Outlook is Stable. A full rating list is shown below.
The upgrades reflect BAC's efforts to boost common equity and liquidity combined with stable to improving asset quality trends in various portfolio categories. The ratings also recognize BAC's sizeable and diversified banking franchise as well as the resolution of management uncertainties since Fitch's last rating action in December 2009.
The upgrades are tempered by BAC's remaining challenges, including a still high level of non-performing loans and exposure associated with mortgage repurchases for rep and warranty issues. Legal risk remains a significant concern, particularly litigation related to the Merrill and Countrywide acquisitions. These combined challenges are considerable yet are considered by Fitch to be well below the various asset quality challenges that BAC's successfully worked through during the last few years.
Reps and warranties exposure primarily stems from BAC's acquisition of Countrywide, a major mortgage originator during the housing boom. Fitch anticipates a large inflow of new repurchase requests as the government sponsored entities (GSEs) and other institutions work through large amounts of troubled mortgages. Consequently, charges from reps and warranties have the potential to increase significantly. Among the major U.S. banks, Fitch believes BAC is the most susceptible to this risk given the scrutiny being placed on the legacy Countrywide mortgages. Costs associated with reps and warranties increased to $1.2 billion in 2Q'10 from approximately a $500 million run rate over the past few quarters. Beyond the rep and warranty issue, another area of concern is exposure to home equity loans, particularly BAC's portfolio of loans with a combined LTV greater than 100%.
Fitch has incorporated notably higher losses associated with repurchase activity in our rating assumptions. Associated losses are expected to remain manageable in the context of BAC's large capital base and pre-provision operating income. BAC's accrued liability for reps and warranties totaled $3.9 billion at end-2Q'10, up from $3.5 billion at year-end 2009.
BAC's Tier I common and TCE ratios are well above year ago levels due to capital raising efforts, improved internal capital generation and a reduction in risk assets. At mid-year 2010, BAC's Tier I common ratio stood at 8% compared with 6.9% a year ago. Fitch core capital to risk-weighted assets was 5.8%, up from 5.1% at year-end 2009. Fitch believes BAC will continue to improve its capital position going forward. Capacity to pay preferred dividends is significantly stronger, given the emergence of core profitability and far lower preferred dividend payments versus peak levels. Preferred dividend costs are now approximately $300 million per quarter compared with a peak level of $1.4 billion in 1Q09.
Looking at 2H'10, Fitch anticipates that BAC's total loan loss provisions, particularly those not related to residential mortgage lending, have the potential to decline further given encouraging asset quality trends. When BAC's asset quality problems are resolved, its franchise gives it considerable earnings power. That said, recent legislative actions including the CARD Act, Regulation E and the Durbin Amendment will pressure consumer-related revenues. In addition, net interest income likely will be negatively affected by weak loan demand and efforts to reduce higher risk/higher spread loans and other assets.
Over time, ratings could be positively affected if BAC attains a solid track record of core profitability and continues to improve its asset quality. Additional factors would be maintenance of its diverse franchise combined with solid liquidity and capital. Greater clarity regarding ultimate reps and warranties loss exposure in the mortgage business and resolution of various legal risks would provide additional comfort, although these could be protracted.
Ratings, particularly the Individual rating, could be negatively affected if asset quality again deteriorates, which is not expected at least in the near term. Downward rating pressure could also emerge if reps and warranties losses escalate appreciably, particularly if costs result in operating losses and erosion of capital.
BAC is one of the largest U.S. banks in terms of total deposits, loans, branches, mortgage originations/servicing and credit card issuance. Following its January 2009 merger with Merrill Lynch & Co., Inc. (Merrill), BAC became one of the top financial institutions in wealth management and investment banking.
Fitch has taken the following rating actions:
Bank of America Corporation
--Long-term IDR affirmed at 'A+';
--Long-term senior debt affirmed at 'A+';
--Long-term subordinated debt affirmed at 'A';
--Preferred stock upgraded to 'BBB-' from 'BB-';
--Short-term IDR affirmed at 'F1+';
--Short-term debt affirmed at 'F1+';
--Individual upgraded to 'C' from 'C/D';
--Support affirmed at '1';
--Support Floor affirmed at 'A+';
--Long-term debt guaranteed by TLGP affirmed at 'AAA';
--Short-term debt guaranteed by TLGP affirmed at 'F1+'.
Bank of America N.A.
--Long-term deposits affirmed at 'AA-';
--Long-term IDR affirmed at 'A+';
--Long-term senior debt affirmed at 'A+';
--Long-term subordinated debt affirmed at 'A';
--Short-term IDR affirmed at 'F1+';
--Short-term debt affirmed at 'F1+';
--Short-term deposits affirmed at 'F1+';
--Individual upgraded to 'C' from 'C/D';
--Support affirmed at '1';
--Support Floor affirmed at 'A+';
--Long-term debt guaranteed by TLGP affirmed at 'AAA';
--Short-term debt guaranteed by TLGP affirmed at 'F1+'.
Banc of America Securities Limited
--Long-term IDR affirmed at 'A+';
--Short-term IDR affirmed at 'F1+'.
Banc of America Securities LLC
--Long-term IDR affirmed at 'A+';
--Short-term IDR affirmed at 'F1+'.
B of A Issuance B.V.
--Long-term IDR affirmed at 'A+';
--Long-term senior debt affirmed at 'A+';
--Long-term subordinated debt affirmed at 'A';
--Support affirmed at '1'.
Bank of America Georgia, N.A.
Bank of America Oregon, National Association
Bank of America California, National Association
--Long-term IDR affirmed at 'A+';
--Short-term IDR affirmed at 'F1+';
--Individual upgraded to 'C' from 'C/D';
--Support affirmed at '1';
--Support Floor affirmed at 'A+'.
Bank of America Rhode Island, National Association
--Long-term IDR affirmed at 'A+';
--Short-term IDR affirmed at 'F1+';
--Long-term deposits affirmed at 'AA-';
--Short-term deposits affirmed at 'F1+';
--Individual upgraded to 'C' from 'C/D';
--Support affirmed at '1';
--Support Floor affirmed at 'A+'.
FIA Card Services N.A.
--Long-term IDR affirmed at 'A+';
--Short-term IDR affirmed at 'F1+';
--Long-term deposits affirmed at 'AA-';
--Short-term deposits affirmed at 'F1+';
--Short-term debt affirmed at 'F1+';
--Long-term senior debt affirmed at 'A+';
--Long-term subordinated debt affirmed at 'A';
--Individual upgraded to 'C' from 'C/D';
--Support affirmed at '1';
--Support Floor affirmed at 'A+'.
MBNA Canada Bank
--Long-term IDR affirmed at 'A+';
--Long-term senior debt affirmed at 'A+';
--Long-term subordinated debt affirmed at 'A';
--Short-term IDR affirmed at 'F1+'.
MBNA Europe Bank Ltd.
--Long-term IDR affirmed at 'A+';
--Long-term senior debt affirmed at 'A+';
--Long-term subordinated debt affirmed at 'A';
--Short-term IDR affirmed at 'F1+';
--Individual remains 'C/D' and on Rating Watch Positive.
--Support affirmed at '1'.
LaSalle Bank Corporation
--Long-term IDR affirmed at 'A+';
--Short-term IDR affirmed at 'F1+';
--Individual upgraded to 'C' from 'C/D';
--Support affirmed at '1';
--Support Floor affirmed at 'A+'.
LaSalle Bank N.A.
LaSalle Bank Midwest N.A.
United States Trust Company N.A.
Countrywide Bank FSB
--Long-term deposits affirmed at 'AA-';
--Short-term deposits affirmed at 'F1+'.
Merrill Lynch & Co., Inc.
--Long-term IDR affirmed at 'A+';
--Long-term senior debt affirmed at 'A+';
--Long-term subordinated debt affirmed at 'A';
--Preferred stock upgraded to 'BBB-' from 'BB-';
--Short-term IDR affirmed at 'F1+';
--Short-term debt affirmed at 'F1+';
--Individual upgraded to 'C' from 'C/D';
--Support affirmed at '1';
--Support Floor affirmed at 'A+'.
Merrill Lynch International Bank Ltd.
--Long-term IDR affirmed at 'A+';
--Short-term IDR affirmed at 'F1+';
--Individual remains 'C/D' and on Rating Watch Positive;
--Support affirmed at '1'.
Merrill Lynch S.A.
--Long-term IDR affirmed at 'A+';
--Long-term senior debt affirmed at 'A+';
--Support affirmed at '1'.
Merrill Lynch & Co., Canada Ltd.
--Short-term IDR affirmed at 'F1+';
--Short-term debt affirmed at 'F1+'.
Merrill Lynch Canada Finance
--Long-term IDR affirmed at 'A+';
--Long-term senior debt affirmed at 'A+';
--Short-term IDR affirmed at 'F1+';
--Individual upgraded to 'C' from 'C/D';
--Support affirmed at '1'.
Merrill Lynch Japan Finance Co., Ltd.
--Long-term IDR affirmed at 'A+';
--Long-term senior debt affirmed at 'A+';
--Short-term IDR affirmed at 'F1+';
--Short-term debt affirmed at 'F1+';
--Support affirmed at '1'.
Merrill Lynch Japan Securities Co., Ltd.
--Long-term IDR affirmed at 'A+';
--Short-term IDR affirmed at 'F1+';
--Support affirmed at '1'.
Merrill Lynch Finance (Australia) Pty LTD
--Short-term IDR affirmed at 'F1+';
--Commercial Paper affirmed at 'F1+'.
BankAmerica Corporation
--Long-term senior debt affirmed at 'A+';
--Long-term subordinated debt affirmed at 'A';
--Preferred stock upgraded to 'BBB-' from 'BB-'.
Countrywide Financial Corp.
--Long-term senior debt affirmed at 'A+';
--Long-term subordinated debt affirmed at 'A'.
Countrywide Home Loans, Inc.
--Long-term senior debt affirmed at 'A+'.
FleetBoston Financial Corp
--Long-term subordinated debt affirmed at 'A'.
LaSalle Funding LLC
--Long-term senior debt affirmed at 'A+'.
MBNA Corp.
--Long-term senior debt affirmed at 'A+';
--Long-term subordinated debt affirmed at 'A';
--Short-term debt affirmed at 'F1+'.
NationsBank Corp
--Long-term senior debt affirmed at 'A+';
--Long-term subordinated debt affirmed at 'A'.
NationsBank, N.A.
--Long-term senior debt affirmed at 'A+'.
NCNB, Inc.
--Long-term subordinated debt affirmed at 'A'.
BAC Capital Trust I - VIII
BAC Capital Trust X - XV
--Trust preferred securities upgraded to 'BBB-' from 'BB'.
BAC AAH Capital Funding LLC I - VII
BAC AAH Capital Funding LLC IX - XIII
BAC LB Capital Funding Trust I - II
--Trust preferred securities upgraded to 'BBB-' from 'BB'.
BankAmerica Capital II, III
BankAmerica Institutional Capital A, B
BankBoston Capital Trust III-IV
Barnett Capital Trust III
Countrywide Capital III, IV, V
Fleet Capital Trust II, V, VIII, IX
MBNA Capital A, B, D, E
NB Capital Trust II, III, IV
--Trust preferred securities upgraded to 'BBB-' from 'BB'.
Merrill Lynch Preferred Capital Trust III, IV, and V
Merrill Lynch Capital Trust I, II and III
--Trust preferred securities upgraded to 'BBB-' from 'BB'.
Additional information is available at www.fitchratings.com.
Applicable Criteria:
--'Global Financial Institutions Rating Criteria', Aug. 16, 2010.
Related Research:
--'Fitch: Large U.S. Bank Ratings Vulnerable to GSE Mortgage Loan Repurchases', Aug. 18, 2010;
--'U.S. Banking Quarterly 1Q10-Finding Stability', June 2, 2010.
Related Research:
Global Financial Institutions Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=547685
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